Yearly Archives: 2012

Does the Gender of Directors Matter?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, September 3, 2012
, ,
More from:

The following post comes to us from Miriam Schwartz-Ziv of the Department of Finance and Banking at the Hebrew University of Jerusalem.

In the paper, Does the Gender of Directors Matter?, which was recently made publicly available on SSRN, I investigate how having gender-balanced boards affects the working of boards. There has always been interest in the makeup of boards of directors, both in the academic literature and in the popular press. Lately, board diversity, and particularly the gender of directors has been a topic of much attention, since there is a recent movement to impose diversity requirements on boards. In the United States, the Securities Exchange Commission requires that companies disclose whether they have a diversity policy, and how it applies to board recruitment practices (Regulation S-K, Item 407(c)). In Europe, several countries (including Norway, France, Spain, and Italy) have already legislated laws enforcing gender quotas. Furthermore, Dr. Viviane Reding, the vice president of the European Commission, is promoting legislation enforcing gender quotas in all European countries (New York Times, March 4th, 2012).

Despite this attention, it nonetheless remains unclear whether diversity has a meaningful impact upon boards of directors, and how such impact might be measured. As emphasized by Hermalin and Weisbach (2003), board composition is jointly determined with firm performance, so it is problematic to draw inferences from the associations between firm performance and board composition. These scholars argue that instead of looking at the impact of boards on a firm’s overall financial performance, it is better to understand the impact of board composition by considering how it affects the actions the board or the firm take, given the board composition at the time the action is taken.

READ MORE »

Forest Laboratories Proxy Fight Vindicates Strong Defense

Posted by Andrew R. Brownstein, Wachtell, Lipton, Rosen & Katz, on
Sunday, September 2, 2012
, ,
More from: , , , ,

Andrew R. Brownstein is a partner in the Corporate Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Brownstein, Igor Kirman, and William Savitt.

Forest Laboratories’ shareholders reelected nine out of ten incumbent director nominees, while rejecting three out of dissident Carl Icahn’s slate of four directors, despite ISS’s recommendation in favor of two of Icahn’s nominees. These results, along with the recent victory by AOL against Starboard (see our memo, AOL Shareholders Reject ISS Supported Activist Hedge Fund), represent an important reminder that companies under attack by dissidents have a chance to defend themselves with a well-crafted message that articulates a strategy for long-term success, notwithstanding strong activist pressure with backing from ISS.

READ MORE »

Corporate Director Elections and Majority Withhold Votes

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, September 1, 2012
, , ,
More from: , , ,

The following post comes to us from Richard Bennett, Chairman of GovernanceMetrics International, and is based on a GMI Ratings study by Kimberly Gladman, Agnes Grunfeld and Michelle Lamb, available here.

Executive Summary

In theory, the most significant corporate governance check and balance between public company shareowners and the company is the ability to elect corporate directors. In reality, that control mechanism is complicated and often compromised for a host of reasons. Nonetheless, there has been an increased focus on director elections in the past few years. This study examines what happens when shareowners withhold a majority of votes from a director nominee.

The significance of majority withhold votes for corporate directors is the subject of some debate in the governance and business community. It is sometimes argued that majority withhold votes are of little import because they are infrequent, rarely lead to director resignations, and typically come in response not to corporate-specific failings, but to violations of perceived best practice (such as the adoption of a poison pill without shareholder approval). At the same time, however, some academic literature has suggested that high levels of withhold votes may be an indicator of generally negative market perceptions of a company. [1]

This current report contributes to this discussion through an examination of majority withhold votes for 175 director nominees at Russell 3000 companies between July 1, 2009 and June 30, 2012. On the one hand, the study confirms that withhold votes occur at a small percentage of companies, and lead to director resignations in only a small proportion of cases. However, we also find that only about half of majority withhold votes are related to best practice issues, and nearly a fifth co-occur with other serious evidence of shareholder dissatisfaction. Our study also examines corporate disclosures regarding board response to majority withhold votes. We find that companies with majority or plurality plus resignation standards for director elections are more likely to make informative disclosures than those with plurality standards. [2] An analysis of withhold votes in connection to financial performance was inconclusive, but suggests directions for further study of this relationship.

READ MORE »

CFTC Proposes Clearing Exemption for Inter-Affiliate Swaps

Posted by Annette L. Nazareth and Margaret E. Tahyar, Davis Polk & Wardwell LLP, on
Friday, August 31, 2012
, , , ,
More from: ,

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. This post is based on a Davis Polk client memorandum, available here.

On August 16, 2012, the CFTC proposed rules that would permit affiliated swap counterparties to elect an exemption from mandatory swaps clearing, subject to various conditions. These conditions include reporting, documentation, risk management and other obligations, and, for swaps between financial entities, a requirement to provide variation margin. [1]

The Commodity Exchange Act requires swaps that have been designated by the CFTC as subject to mandatory clearing to be submitted for clearing to a designated clearing organization – unless a counterparty qualifies for an exemption from the clearing requirement. In proposing the inter-affiliate exemption from the clearing requirement, the CFTC recognized the risk management benefits and efficiencies that uncleared inter-affiliate swaps may provide for large financial and other organizations, but also noted its concerns about the “systemic risk repercussions” of uncleared inter-affiliate swaps. These concerns are reflected in the proposed conditions that would apply to affiliated counterparties seeking to rely on the exemption.

The CFTC’s proposed requirements for the use of the exemption are highly controversial. In particular, CFTC Commissioners Sommers and O’Malia voted against releasing the proposal because, in their view, the variation margin requirement is unwarranted. The comment period for the proposed rules will end 30 days after publication of the proposal in the Federal Register, which is expected to occur shortly.

READ MORE »

Capital Adequacy Rules, Catastrophic Firm Failure, and Systemic Risk

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, August 31, 2012
, , , ,
More from:

The following post comes to us from Robert Jarrow, Professor of Finance at Cornell University.

In the paper, Capital Adequacy Rules, Catastrophic Firm Failure, and Systemic Risk, which was recently made publicly available on SSRN, I study capital adequacy rules based on Value-at-Risk (VaR), leverage ratios, and stress testing. VaR is the basis of Basel II, and all three approaches are proposed in Basel III.

Due to the 2007 credit crisis, the need for increased regulatory capital has been addressed by newly enacted legislation in the Dodd Frank Wall Street Reform and Consumer Protection Act, and the Basel III capital proposals. The existing and proposed capital adequacy rules are based on three methodologies: Value- at-Risk (VaR), maximum leverage ratios, and stress testing. The purpose of this paper is to analyze the impact of these three rules on the likelihood of financial institution catastrophic failure, and systemic risk in the economy.

A related literature on bank capital concerns the impact of capital regulation on bank risk taking behavior and the business cycle. Kahane (1977), Kim and Santomero (1988), Furlong and Keeley (1989), Rochet (1992), and Blum (1999) study models to determine if capital regulations decrease the risk of insolvency. The answer is yes and no, depending upon the bank’s objective function and market structure. This paper differs from this literature in two ways. First, I am concerned with the probability of catastrophic failure, keeping the probability of insolvency fixed at a level determined by the regulators. Second, with the exception of Kahane (1977), banks are not able to short assets in these models. Shorting assets enables banks to create large left-tail loss distributions and is consistent with current banking practice. An essential element of our model structure is that we allow financial institutions to short risky assets.

READ MORE »

Money Market Fund Reform

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, August 30, 2012
, ,
More from:
Editor’s Note: Mary Schapiro is Chairman of the U.S. Securities and Exchange Commission. This post is based on a statement from Chairman Schapiro, available here. The views expressed in this post are those of Chairman Schapiro and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Three Commissioners, constituting a majority of the Commission, have informed me that they will not support a staff proposal to reform the structure of money market funds. The proposed structural reforms were intended to reduce their susceptibility to runs, protect retail investors and lessen the need for future taxpayer bailouts.

I — together with many other regulators and commentators from both political parties and various political philosophies — consider the structural reform of money markets one of the pieces of unfinished business from the financial crisis.

While as Commissioners, we each have our own views about the need to bolster money market funds, a proposal would have given the public the chance to weigh in with their views as well. However, because three Commissioners have now stated that they will not support the proposal and that it therefore cannot be published for public comment, there is no longer a need to formally call the matter to a vote at a public Commission meeting. Some Commissioners have instead suggested a concept release. We have been engaging for two and a half years on structural reform of money market funds. A concept release at this point does not advance the discussion. The public needs concrete proposals to react to.

READ MORE »

Money Market Funds Need Further Study

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Thursday, August 30, 2012
, ,
More from:
Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on a statement from Commissioner Aguilar, available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Having reviewed the Chairman’s proposal on money market funds, it is clear to me that there is much to be investigated related to the cash management industry, as a whole, before a fruitful discussion can be initiated as to whether additional structural changes should be made to only one segment of the cash management industry — SEC-registered money market funds.

The cash management industry is a large industry that includes many pooled vehicles exempted from registration and largely excluded from regulatory oversight. There are larger macro questions and concerns about the cash management industry as a whole that must be considered before a specific slice of that industry — money market funds — is fundamentally altered. To move forward without this foundation is to risk serious and damaging consequences in contravention of the Commission’s mission.

I am, and continue to be, supportive of the Commission putting forward a thoughtful and deliberative concept release that asks serious and probing questions about the cash management industry as a whole to diagnose its frailties and assess where reforms are required. This release should include all pooled cash management mechanisms so that the Commission is knowledgeable about how trillions of dollars are managed and understands how this money is able to move from the regulated, transparent money market fund market to the opaque, unregulated markets.

READ MORE »

Delaware Case Raises Question About Structuring Director Compensation

Posted by Arthur H. Kohn, Cleary Gottlieb Steen & Hamilton LLP, on
Thursday, August 30, 2012
, , ,
More from: , , ,

Arthur H. Kohn is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Kohn, Janet Fisher and Samuel Bryant. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

A recent opinion of the Delaware Chancery Court, Seinfeld v. Slager, [1] addresses the legal standard applicable to directors’ decisions about their own pay under Delaware law, an important topic as to which there is little prior law. In an opinion by Vice Chancellor Glasscock, the Court held that a derivative claim alleging that directors breached their fiduciary duties by granting themselves excessive compensation survived a motion to dismiss. [2] In so concluding, the Court also found that the directors’ action did not have the protection of the business judgment rule and was instead subject to “entire fairness” review.

The Court’s decision to require “entire fairness” review means that the claim of excessive compensation could proceed to a full evidentiary trial on the merits. Under Delaware law, a court will not second-guess business judgments of directors if the directors acted in good faith, exercised due care and were not conflicted in the matter. When the business judgment rule does not apply, the judgments may be subject to heightened scrutiny under the entire fairness standard. To meet this standard, the directors must demonstrate that both the process undertaken by directors and the amount of their compensation are fair to the company.

READ MORE »

Handling a Corporate Crisis

Posted by Matteo Tonello, The Conference Board, on
Wednesday, August 29, 2012
, , ,
More from: , , ,

Matteo Tonello is managing director of corporate leadership at the Conference Board. This post is based on an issue of the Conference Board’s Director Notes series by John F. Savarese, partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This Director Note was based on an article written by Mr. Savarese; the full version, including footnotes, is available here.

The ongoing fallout from the 2008 financial crisis has generated a host of unprecedented challenges for broker-dealer, investment banking, investment advisory, and other financial services firms. Last year alone, the industry was hit with wave upon wave of criminal prosecutions, regulatory enforcement proceedings, and parallel private civil actions. In fiscal year 2011, U.S. Attorneys’ offices nationwide collected $6.5 billion in criminal and civil actions, and the U.S. Securities and Exchange Commission commenced 735 enforcement actions and obtained over $2.8 billion in penalties and disgorgement. Many of the more high-profile matters also triggered congressional hearings as well as massive adverse press attention and publicity.

The securities and financial services industry has been a key focus of government attention. As announced by President Obama in his January 2012 State of the Union address, the U.S. Department of Justice has formed a new unit within the Financial Fraud Enforcement Task Force—the Residential Mortgage-Backed Securities Working Group. The group will consist of at least 55 DOJ lawyers, analysts, agents, and investigators from across the country and will be chaired by the heads of the DOJ’s civil and criminal divisions, the U.S. Attorney from Colorado, SEC enforcement head Robert Khuzami, and New York Attorney General Eric Schneiderman. It will focus on investigating those responsible for misconduct contributing to the financial crisis through the pooling and sale of residential mortgage-backed securities. The unit has already sent subpoenas to 11 financial institutions.

Officials have also said that this new unit would most likely focus on Wall Street firms, big banks, and other entities that the public believes have avoided scrutiny for their role in the housing crisis.

READ MORE »

The Evolving Importance of Banks and Securities Markets

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, August 29, 2012
, ,
More from: , ,

The following post comes to us from Asli Demirgüç-Kunt, Director of Development Policy in the World Bank’s Development Economics Vice Presidency (DEC) and Chief Economist of the Financial and Private Sector Network (FPD), Erik Feyen, Senior Financial Economist in the Policy Unit of the World Bank’s Financial and Private Sector Development Vice Presidency (FPD), and Ross Levine, Willis H. Booth Chair in Banking and Finance at the University of California, Berkeley.

In our recent NBER working paper, The Evolving Importance of Banks and Securities Markets, we evaluate empirically the changing importance of banks and securities markets as economies develop. In particular, we focus on assessing whether economies increase their demand for the types of services provided by securities markets relative to the services provided by banks as countries grow. To empirically test whether the economic development “returns” to improvements to both bank and securities market development change as economies grow, we use data on 72 countries over the period from 1980 through 2008 and aggregate the data in 5-year averages (data permitting), so that we have a maximum of six observations per country. We use several measures of bank and securities market development, including standard indicators such as bank credit to the private sector as a share of gross domestic product (GDP), the value of stock market transactions relative to GDP, and the capitalization of equity and private domestic bond markets relative to GDP.

READ MORE »

Page 22 of 63
1 … 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 … 63